Greetings, and welcome to the Flotek Industries' Second Quarter 2019 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Danielle Allen, Senior Vice President, Global Communications and Technology Commercialization for Flotek. Thank you. Madam, you may begin.

Thank you, and good morning, everyone. We appreciate your participation. With me on today's call are John Chisholm, Flotek's President and Chief Executive Officer and Elizabeth Wilkinson, our Chief Financial Officer. Yesterday afternoon we release our earnings press release for the second quarter of 2019, which is available on our Web site. In addition, this morning we posted a related supplemental presentation to our Web site. Today's call is being webcast, and a replay will also be available on our Web site. Please note that any comments we make on today's call regarding projections or our expectations for future events, are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual events to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. Finally, after our prepared remarks will answer any questions you may have. So with that, I will turn it over to John.

Thanks, Danielle. We appreciate everyone who joining us for today's call. As we discussed on our first quarter call, we expected during the second quarter that the oilfield services sector would and in fact did continue to operate in a volatile environment for U.S. onshore drilling and completions activity. We anticipate a similar backdrop for the third quarter, which is in-line with the consensus of other oilfield service providers with U.S. land operations. Despite this environment, I'm pleased to report that we ended the second quarter with a cash balance of $97.5 million, which was essentially level with the balance reported from March 31st. We recognize that shorter cycles of continued and sometimes extreme volatility, are part of the new normal we operate in today, and will continue to experience in the foreseeable future. As discussed in a research report from Deloitte, published in April, titled, "Decoding the Oil and Gas Downturn", the oilfield services segment has never been more fragmented than it is today. Two main themes of the report are the service providers must distinguish themselves technologically, and they should also develop new and innovative commercial models throughout the value chain. This further supports and validates our continued focus on reshaping our business to proactively position ourselves for long term success. This includes controlling the controllables. Controllables can mean different things to different organizations. For Flotek, this meant concentrating on our core competencies as a best in class provider of reservoir sensory chemistry solutions for the oil and gas industry. In this capacity, we have and will continue to focus on; enhancing internal processes, while rightsizing the enterprise and taking costs out of the business to drive increased efficiency and profitability; closely collaborating with operators to identify and define industry challenges; ensuring we build technical peer to peer…

Thanks John. Similar to last quarter, the financial tables in our press release present the operations of CICT segment as a discontinued operation for all periods. As such, I will focus my discussion today on quarterly results for our continuing operations, which includes our energy business, as well as our supporting research and innovation and corporate functions. At going John's comments, we operated in an environment that has continued to be volatile for U.S. onshore drilling and completions activity. This impacted both our top-line and margin results for the second quarter, and we expect these conditions to continue to impact us in the third quarter. Revenue for the second quarter was $34.7 million compared to $43.3 million for the first quarter. As John discussed, in addition to the challenging industry backdrop for U.S. land, our results were directly impacted by the rebuilding of leadership and personnel in our sales organization, the deferral of completion activity to the third quarter by certain clients, and the utilization of performance driven pricing programs for a limited number of strategic clients. Operating expense was $38.3 million for the second quarter versus $44.6 million for the first quarter. Fundamentally, the decrease in our operating margin was due to fixed and semi variable costs being absorbed by a lower level of revenue. Looking at the third quarter, we expect our top-line results could decline from second quarter due to the factors we've discussed. However, we do see opportunity for significant margin improvement, primarily as a result of increased efficiencies in our logistics, including last mile delivery, and other operational cost reduction initiatives. Corporate G&A decreased to $6.1 million from $7.3 million for the first quarter, primarily due to non-recurring severance costs recorded in the first quarter associated with our sale of Florida Chemical. Research and innovation…

Thanks, Elizabeth. The onshore North American upstream oil and gas industry continues to evolve rapidly. More recently, this has included heightened investor scrutiny of capital spending, cash flow generation and return on capital considerations. As a result, oilfield service providers are under more pressure than ever to provide E&Ps with superior product and service offerings and as I mentioned earlier, technical differentiation. We, like many others in the industry, believe the truly customized chemistry and fluid systems for the reservoir is the next critical step to drive enhanced, both near and long term, well production and related economics. We recognize this many years ago. And even with our significant cost cutting efforts, we have not compromised our efforts to expand our unique portfolio of proprietary products and further enhanced our in-house technical understanding of fluid system design and application. As we've stated in the past, we believe this sets Flotek apart from its competitors. In closing, we are optimistic that our differentiated technologies combined with our proactive efforts to enhance our financial performance and improve our operations and sales capabilities, are positioning Flotek for long term success. So with that, we will now open it up for questions. Similar to the last couple of our calls, given his role as Co-Chair of the Strategic Capital Committee, I've asked David Nierenberg to join us during the Q&A. Operator, we'll now open for calls.

So John, if I may before we go into the question and answer mode. I'd like to make some comments as well about the Strategic Capital Committee. There's no question that Q2 was public. And as Elizabeth described, there was a fair amount of non-recurring and housekeeping events, which made it look even uglier than it actually was. But it was ugly. However, my new job as non-executive board chair and as Elizabeth is co-chair of the strategic capital committee requires that we follow the wisdom of that sage, John Rivers, who said, get over it, grow up already, and we are. We will not panic. We will not make rash or short term asset allocation decisions. Rather, we will use time arbitrage to help Flotek get well as it buys time through continued intense cost reduction shrewd monetization of its strong balance sheet, sharpening Flotek's strategic focus, enabling our new sales team to rebuild sales momentum and finding the right leader to execute our strategy well for the benefit of all stakeholders. We pledged a substantial strategic update today, here it is. We are making considerable forward progress, deliberating about and selecting among competing alternatives, ranging from paying a special dividend, to share repurchase, to investing in profitable organic and inorganic growth. Each prospective allocation have been weighed and weighted using such factors as; the current capital markets for oilfield services companies, which makes our balance sheet strength extremely advantageous today; the strength and weakness of Flotek; a preference to build on Flotek's profitable strengths, but not on weaknesses; a willingness to consider inorganic growth if it would magnify our strengths, provide economies of scale reduce risk and make us immediately profitable; and attracting strong leadership. Now I want to amplify on these words. Our assessment of the current…

Thanks David. And operator, go ahead, we will take questions.

Thank you, sir [Operator Instructions]. The first question comes from. Please go ahead.

John, I guess I appreciate all the commentary. First place I wanted to start I guess was on strategic side. David, you gave a lot of detail and thought into how you're thinking about moving forward. And certainly, appreciate the lack of wanting to purely use financial engineering here with the cash on hand. Sounds like there's considerable amount of opportunities that you're looking at, taking into account what I think is a prudent thing to do, right? Immediately, at least, accretive positive cash flow business for you. How do you think about the sizing of those opportunities? And particularly, given where as you mentioned, there's been stress on leverage demand within the old service space? How do you think about the long term leverage you're willing to put on this business, depending on you finding the right opportunity on the acquisition front?

I want to make sure I understand your question, right? Did you asked how much leverage we want to put on the business?

How much leverage, I guess, long term that you'd be willing to put on the business depending upon the acquisition that you may find?

A two word answer would be, not much. Not much in this capital environment.

Okay, make sense. Just wanted to make sure, given there are some, it sounds like, sizable opportunities out there. Okay. Second question, on the sales front, you guys mentioned the addition of Mark. Just wanted to get a few more thoughts on, just detail on the sales team impact and how quickly we may be able to see that on the CnF sales front? And then second part of the question, just the performance pricing program you all have mentioned. And John, I think you mentioned 4Q, we could start to see that that positive turn. Just any more detail you can provide on that process would be great.

Sure. So, as everybody who's familiar with the story knows that the sales cycle on the CnF is typically at best to 60 days and sometimes 120 day process. It's just the way it works by the time you get the right amount of people and the right people around the table. But we are trying to accelerate that with these strategic targeted performance-based engagements. And I think we're not going to say with who but we will say that we're encouraged with the acceptance of those from a client perspective and also, the early indications of what we felt would happen. With respect to the sales group. As we mentioned in the earlier remarks, we've been able to attract folks from different parts of the value cycle, whether it's been rock property analysis with some log background, whether it's more from a distribution standpoint of companies that are in that value cycle. So we have a much more diverse sales approach than we had earlier that's recognizing. The E&P companies themselves are becoming more diverse with the people that are involved in selecting the chemistry. And we think that's exactly where we need to be. And I think an important thing to mention, again, is that one of the driving reasons for those folks joining us is they wanted to interact with the ultimate end user. And that's obviously was a criteria for us and they've met that criteria. Hopefully, that helps, George.

The next question is from Mike Urban of Seaport Global. Please go ahead sir.

So helpful commentary on the outlook, and obviously very thoughtful process around the valuation of the business, presumably before you look at any type of acquisition, and I would generally agree that it's certainly a buyers' market. But at the same time, clearly that add value, which in my perspective, would be just having the organization structurally profitable, such that you're just not adding, not only revenue and EBITDA to just structurally unprofitable business. So if we take a step back in Q2, obviously, there's some reasons for that. Could lay out a path to when and how we get to that point where it might make sense to layer something on? I guess, is there starting point with the incremental $5 million in annualized savings that still get you there. How much of the negative EBITDA, if you will, were things that you think will reverse here, are some of these transitory factors. But again, just more broadly a path to at least getting this thing to a point where it might structurally make sense to layer on another business?

Yes, I'm going to get Elizabeth give you a little bit more context on that. Clearly, the overall macro environment that you've listened to throughout the earnings season is going to be a challenge for everyone in the third quarter. And now people are wondering where people going to run out of money in the fourth quarter for heaven sakes. So this is a position for Flotek that we have to drive the top line in a profitable way. And as we started out with our remarks about controlling the controllables, we have right sized this enterprise in a way that you'll see meaningfully improvement in the EBITDA number through the remainder of the year with the qualification that there still needs to be a sustained level of macro activity in North America. But Elizabeth can chime in with a little bit more context to give you a pathway forward.

So I guess what I can add is just the EBITDA outlook. Driving think into the year, we were very focused on trying to adjust our business, especially from the cost cutting perspective that would allow us to get to even breakeven and positive EBITDA in latter part of the year. And I think it's definitely going to be challenging to do that. Based on what we've been seeing at this point in the year. But we remain hopeful that we'll be moving significantly in that direction. So much depends on revenues. When we're looking at this whole thing earlier in the year, we're really anticipating a year lot more like last year. On the other hand, we're doing a lot of things to improve our cost structure. So what I can tell you is that we are being very strategic in making meaningful traction later in the year. And we think that our strategy that we have in place will speak loudly as we see some of these things develop later, we'll speak loudly for our future prospects.

Mike, we appreciate the leaning of your comment and your questions. We are using the current period to continue working on structure. We are also, as you know, we've made two great additions to our management team this year with Elizabeth and Mark. And we are continuing to build a solid foundation here, because you're right. It would not be sensible to be making an acquisition until such time as we felt about how we were operating. And we're getting there. We're getting there fast. But you're quite right.

And I guess, again, I just realized you're still going through this process. But any kind of help you can give us, even kind of on a backward looking basis in terms of the second quarter of the things that kind of drove the magnitude of that negative EBITDA. Again you referenced some things being better on logistics, customer studies and things like that. Because if we're talking about $40 million-ish of annualized negative EBITDA, you take out $5 million and you're still -- in costs, you're still at kind of negative $35 million that's a lot of revenue. I'm just trying to -- if it helps at all kind of bridge that, I think that'd be a big help for us and for people on the call and potential investors.

So I mean, just generally, I think we talked about things, which I think -- the revenue side, on the cost side. We basically have cost cutting activities that we've just undertaken that are going to cut our personnel costs significantly, as well as certain logistics contracts changes that we've made, which we also think will continue to improve those costs. So I think it's just a combination of some different things playing in that we believe we will be seeing some improvement, notwithstanding the revenue pressures.

Well, I guess maybe that's a better way to tackle it, I mean the kind of the macro backdrop. Certainly, you said you're focusing on what you can't control. You can't really control the macro backdrop. But once you get through all of the things that you can't control, the cost efficiency and I think on some of these kind of one off or anomalous costs with the kind of normalized cost structure that you envision. What level of revenue would it take? So we can kind of take -- we can all make our own assumptions on the macro. But what level of revenue would it take to get to that EBITDA breakeven level?

I guess, generally, we've been wanting to see things getting back to something in the sort of first quarter type of revenue range, or higher, to get us back into that neighborhood where we think that's achievable.

Mike, a lot of it has to do with the mix, the products sold, the higher the mix of CnF, the lower the breakeven level.

And then would you -- again with respect to the timing. Is there any expectation in your current outlook that you see a meaningful international sale over the balance of the year?

So we're continually encouraged by the international activity, both in South America and the Middle East. For market competitive reasons, we're not going to get into a whole lot of detail except to say this. In early September, both Elizabeth and Mark are headed over to the UAE to establish a Flotek branch office there. And I think the takeaway we'd like to leave is we wouldn't be going through that effort if we didn't feel comfortable about the near and midterm outlook of increased activity in the Middle East. And I think we'd like to leave it at that for now.

And then I guess just couple of housekeeping things, I think I may have missed it. You're continuing to reduce G&A costs. You've done a great job on that. What's your expectation for the third quarter?

So generally, we're on track with our goal for getting done on a cash basis to something in the neighborhood of $5 million. However, we do know already that based on the outcome of our price uptick as a result of the sale of Florida Chemical when we did our fair value on our stock-based compensation, our costs have gone up considerably to the point where we're probably going to have an extra $400,000 a quarter just for stock-based comp So on a cash basis, I think we're going to be in that neighborhood. But on a overall total expense, I think it's going to go up a little bit.

So up relative to I guess $1.2 million of stock based comp in 2Q, so up $300,000, $400,000 to that?

So I mean, we still think it's going to be coming down from the Q2 level, just to be clear. But I just don't think we're going to get down to that $5 million level for the total expense.

And then last one for me. What's your full year CapEx expectation?

Approximately $3.7 million…

[Operator Instructions] The next question is from [indiscernible] of [Wylan Management]. Please go ahead, sir.

Elizabeth, on the call, you mentioned that you expect the cash position to be level at the end of Q3 to where it is right now. Does that assume that you guys are collecting some of the escrow funds, or is there just more working capital to take out in the meantime that gets you to cash flow breakeven number for the third quarter?

Yes, it does actually assuming that we would be collecting some of the escrowed funds. And that is one of the things that it will be a little bit in play, because we haven't finalized our agreement with ADM with regard to how much of the adjustment escrow will be entitled to. So that process is still ongoing. So there is a little bit of play there depending on the determination of the adjustment escrow, the post-closing working capital adjustment at escrow.

And then in terms of working capital. Is this a good -- where we ended at the end of Q2, is that kind of a good level to kind of think about going forward? Or is there more opportunity to still pull cash for the business and still pull some cash out of working capital from where we are today.

No, I don't really anticipate. Like for example, the change in our inventory, I don't anticipate that we're going to be continuing to do that further. I mean, we've basically tried to adjust and allow ourselves to play out some excess inventory that we had on hand. But we're definitely going to be getting very, very focused about -- I mean, as part of these costs initiatives that we talked about undertaking. Right now, one of them is very, very focused on procurement activities and inventory management. But I'm not sure that that's necessarily going to mean that it's lower than what you're seeing right now. In fact, we might have a little bit of an inventory build just based on our expectations.

I want to change gears a little bit, one of the things that that was noticeably absent from the conversation around what you all planning to do with the cash cushion right now was just, you didn't really explore the, or didn't talk about the exploration of selling the business. You guys are now trying to build these relationships that there are a lot of people, a lot of bigger companies out there that already have those in-basin relationships that you guys want to get deeper with. And there's obviously a lot of overhead into running your business that exists that wouldn't exist in the hands of one of those companies. And with sitting here thinking as a shareholder would -- could potentially create a lot of value in a shorter time than going out and building these relationships and building the business. So can you guys just comment a little bit on that and what you've explored there?

When the company has a strong balance sheet and it's turning itself around, I think the sense of the committee is, and I think I can speak to the board as well, is that if we were to do what you were saying, it would make a lot more sense to do that, at the time when the company was performing very well and was perceived to be performing very well. And so when I used the phrase time arbitrage earlier, that's one possibility. But again, if a company has a very weak balance sheet and isn't performing well, then they need to tell itself. But we have a lot of opportunity to add value to what we have here. And we have -- I think, all of us come to the conclusion is the better thing to do is to keep our head down and make those good things happen.

We have reached our allotted time. I'd like to turn the conference call back over to management for any closing comments.

Thanks, operator, and thanks for the questions. And hopefully with David's input as well there, we are able to provide as much clarity and context as to where we are and where we believe we're headed. Hopefully, we'll have a chance to see some of you in person in Denver on Wednesday next week when we present at EnerCom's Oil and Gas conference. For those of you who can't make it, you can listen to it on the webcast. It will be going around 10:15 Central Time. We'll also participate in Johnson Rice's Annual Energy Conference that will be held at September 23rd to the 25th in the Big Easy, in New Orleans. Again, thanks for everyone's continued interest in Flotek. We appreciate the patience and support of our shareholders. Hope everyone has a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.